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Budget review 2011

January 2011


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MINISTRY OF FINANCESnellmaninkatu 1 A, Helsinki

PO Box 28, FI-00023 Government

FINLAND

Tel. +358 9 160 01 or +358 9 578 11 (exchange)

Fax +358 9 160 33123

Official e-mail: [email protected] (documents etc.)Media and Communications: [email protected]

Personal e-mail addresses: [email protected]

Internet: www.financeministry.fi

Orders: Ministry of Finance/Budget Department, tel. +358 9 160 33103

Layout: Anitta Heiskanen

ISBN: 978-952-251-135-5 (pdf)


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Contents

ECONOMIC OUTLOOK FOR 2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Table Trendsinthenationaleconomy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

FISCAL POLICY AND SUSTAINABILITY OF PUBLIC FINANCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Figure Age-relatedexpenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Table Generalgovernmentfnances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

A STEP TOwARDS BALANCINg CENTRAL gOvERNMENT FINANCES. . . . . . . . . . . . . . . . . . . . . . . 12

Figure On-budgetexpenditurebyadministrativebranchin2011. . . . . . . . . . . . . . . . . . . . . . . . . . 13

Table Selectedmonthlybeneftsin2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Table Averageexpensesoselectedpublicservicesin2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Table Incometaxscalein2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Figure Incometaxrate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

2011 BUDgET IN DEFICIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Figure On-budgetexpenditure20082014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Figure Centralgovernmenton-budgetrevenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Figure Centralgovernmentdebt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Figure Whattaxeurosarespenton. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Figure Wheretaxeurosderiverom. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

CENTRAL gOvERNMENT EU REvENUE AND EPENDITURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Table FlowocontributionsbetweenFinlandandtheEU. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

IMPROvED OUTLOOK FOR LOCAL gOvERNMENT FINANCES, BUT SPENDINg

DISCIPLINE STILL REqUIRED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

FigureAnnualmargins,depreciationandnetinvestmentomunicipalitiesandjoint

municipalauthorities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

OThER SELECTIONS FROM ThE 2011 BUDgET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27


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Trends in te national economy

Forecast, December 2010

2007 2008 2009* 2010** 2011**

GDP at market prices (EUR bn) 179.7 184.6 171.3 180.0 189.1

GDP, change in volume (%) 5.3 0.9 -8.0 3.2 2.9

Unemployment rate (%) 6.9 6.4 8.2 8.4 7.8

Employment rate (%) 69.9 70.6 68.3 68.2 69.0

Consumer price index, change (%) 2.5 4.1 0 1.2 2.4

Interest rate (10 year bonds) (%) 4.3 4.3 3.7 3.0 3.3

Economic outlook for 2011Te brisk recovery of the world economy will continue, with economic growth

buoyant in 2010 and 2011 at over 4 per cent. Te focus of growth will be in emerging

economies, such as China. Robust support and stimulus measures are contributing

to growth, but private demand is also strong, particularly in emerging economies.

Te demand-led recession adversely aected the Finnish economy rapidly and

strongly due to a decline in exports. In 2009 GDP fell by 8 per cent. Recessions resulting

from a lack of demand are generally relatively short-lived and this also seems to be

case on this occasion. In 2010 the Finnish economy returned to a growth track, andGDP rose on estimate by 3.2 per cent. In 2011 economic growth will be driven largely

by strong development of exports and recovered domestic demand, and GDP growth

is forecast at just under 3 per cent.

Te resumption of economic growth will have a delayed impact on employment.

Work input measured in working hours started to grow already in 2010 as the number

of lay-os will fall. In 2011 the employment situation wil l improve. At the same time,

however, a change in population age structure will constrain labour supply in the long

run, as from this year forward the number of 1564 year-olds is estimated to decline

on average by up to 20,000 people per year. Te employment rate will rise in 2011

to some 69 per cent and the unemployment rate will fall to a little under 8 per cent.

A marked rise in world market prices and a weakening of the euro resulted in a

sharp pick-up in import and producer prices in early 2010. In 2010 consumer prices


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rose on estimate by 1.2 per cent. In 2011 the rise in consumer prices will follow import

and producer prices at an average of 2 per cent. Increases in indirect taxes will alsoraise domestic prices.


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Fiscal policy and sustainability of publicfinancesTe outlook for general government nances is overshadowed by rapid growth in

age-related expenditure during the next two decades, when population ageing in

Finland will be the fastest in Europe. In the current decade, pension expenditure

will grow particularly quickly. In the 2020s long-term care expenditure is projected

to grow rapidly as the baby boomer generation enters old age.

Te economic crisis has changed the priorities and bases of scal policy. As a

result of the crisis, the balance of general government nances has weakened sharplyowing to a fall in tax revenue, growth in cyclical expenditure, and central government

stimulus measures. General government nances are therefore in a more vulnerable

position from which to meet expenditure pressures and a narrowing of the tax base

arising from population ageing. Ensuring the sustainability of public nances now

represents a bigger challenge. Te economic policy to be implemented aer the

economic crisis must take these altered conditions into consideration.

Te restoration of public nances will require structural reforms as well as scal

policy tightening. Extending working careers and improving the productivity of public

services will play a key role. Te longer the restoration of public nances is delayed,

the greater the costs will be.

Ae-related expenditure, in ratio to gDP, %

0

10

20

30

2008 2015 2020 2030

%

0

10

20

30

2008 2015 2020 2030

%

Pensions Health care Long-term care

Unemployment TrainingSource: Ministry of Finance, Finlands Public Finances at a Crossroads. Age-related

expenditure calculated using the Ministry of Social Aairs and Health`SOME` model.


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Eorts to improe public sector productiity

Giventhepositionogeneralgovernmentfnancesandlabourscarcity,itisessentialorservicestructuresandprocessestobe developedsothatinuturethecentralgovernmentsectorspersonnelrequirementislessthanatpresentandgrowthinlocalgovernmentspersonnelrequirementismoderated.Publicsectorproductivitywillbeenhanced,orexample,byutilisinginormationsystemsandimprovingtheirinteroperability,andbyrenewingstructuresandserviceconcepts.Saeguardingwellbeinginworkandorganisingworkingtasksecientlywillimproveproductivity.Raising the productivity owelare services isone key actor inresolvingthesustainabilityproblemogeneralgovernmentfnancesoverallaswellaslocal

governmentfnances.Theemphasisomunicipalandservicestructurereorminuturewillbeonboostingproductivityandimprovingoperationaleciency.TheGovernmenthassupportedthedevelopmentomunicipalsectorproductivitybyinitiatingproductivityprogrammeworkinthe20largestcities.

Intermsothecentralgovernment,theGovernmentiscommittedtoreducingthecentralgovernmentslabourrequirementtoanoveralllevelin2011o9,645manworkingyears(c. 8per cent)lowerthanin2005.Newproductivitytargetsoutlinedinthe20082011SpendingLimitsDecision(a4,800manworkingyeardecreasein20122015)andthemeasurestheyrequirewillbeormulatedintoprojectpackagestobemonitoredonanadministrativebranchbasis.Retirementandotherpersonnelattrition,however,willbesignifcantlygreaterthantheagreedreductionsinman

workingyears.


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Balancing public nances the objectiveAlthough the economy picked up in 2010, the decit in general government

nances will deepen further, because changes in economic conditions will become

apparent in general government nances with a delay. In 2010 the decit in general

government nances is projected to exceed the 3 per cent decit limit of the

European Unions Stability and Growth Pact. In 2011 the state of public nances

will improve, even though it will still remain in decit to the tune of 1.3 per cent

in ratio to GDP. Te Governments objective is for Finlands public nances to be

among the best of the euro area countries in 2011.

Te raising of value-added tax rates in July 2010 and the tax increases of the 2011budget proposal (see page 16) are the rst steps towards balancing central government

nances and therefore general government nances, too. Fiscal policy will change

gradually from stimulus to tightening. Public nances must still be strengthened,

however, to ensure that the sustainability gap is closed. Te Government will prepare

a plan extending over the next two parliamentary terms to stabilise public nances,

aer receiving the results of the tripartite Programme for Sustainable Economic

Growth and Employment.

general oernment finances

Key figures measured in terms of national accounting relative to GDP, per cent

Forecast, December 2010

2007 2008 2009* 2010** 2011**

Taxes and social security contributions,

% of gDP 42.9 43.0 43.0 42.4 43.0general oernment expenditure, % of gDP 47.2 49.3 56.0 55.4 54.4

Net lendin, % of gDP

central government

local government

employment pension schemes

other social security funds

5.2

1.0

-0.2

4.1

0.3

4.2

0.5

-0.4

3.9

0.1

-2.7

-4.9

-0.5

2.9

-0.3

-3.2

-5.9

0.0

2.8

-0.1

-1.3

-4.1

0.0

3.0

-0.1

general oernment debt, % of gDP 35.2 34.1 43.8 47.9 50.0

Central oernment debt, % of gDP 31.2 29.5 37.5 42.0 44.4


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A step towards balancing centralgovernment f inances

Te recession that began in autumn 2008 has been addressed by an extensive

package of measures in several stages, starting with the August 2008 Government

budget session. Te scale of central government stimulus measures in terms of

national accounts has been 1.8 per cent in ratio to GDP in 2009 and 1.6 per cent

in 2010. Te one-o stimulus measures and projects decided in 20092010 will

partly continue also in 2011, whereupon the cost impact of the measures in centralgovernment nances is estimated to be 0.5 per cent in ratio to GDP.

However, the impact of the xedterm stimulus measures will be gradually

removed in the 2011 budget the reduction is around EUR 0.5 billion. In addition,

the hole le in central government nances by the 2010 abolition of the employers

national pension contribution is lled by net increases in energy taxes totalling around

EUR 730 million. Moreover, the new value-added tax rates that came into force from

the beginning of July 2010 improves the balance of central government nances by

EUR 430 million on an annual basis. Fiscal policy will be gradually tightened.

Te main aspects of the key expenditure increases of the 2011 budget as well as

tax criteria changes are outlined below.

Eforts to increase renewable energy production

In accordance with European Union targets and the Governments Climate and

Energy Strategy, use of renewable energy will be increased. Te budget allocates a

EUR 55 million production subsidy for renewable energy, the intention of which is

to pay for electricity produced by wind power, biogas, forest chips and wood fuel.

Te energy subsidy funding authorisation is increased to nearly EUR 150 million,

i.e. by around EUR 85 million compared with the ordinary 2010 budget. Tis additional

authorisation will be used to fund, among other things, support for transport biofuel

demonstration plants.

Te shi to renewable energy in electricity- and oil-heated houses will be accelerated

through an additional EUR 30 mil lion in energy grants for buildings.

In addition, a net increase in appropriations totalling EUR 10 million is allocated

to a new energy subsidy for small-sized thinning wood in 2011. It is estimated that the

system can be launched in early April 2011. In the Act on the Financing of Sustainable

Forestry the parts on aid for harvesting of energy wood and chipping of energy wood

will be revoked.


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Progress o studies to be acceleratedIn 2011 a package of measures aimed at lengthening working careers at the starting

end is launched. Tere is greater emphasis on study counselling at all levels of

education. o speed up graduation in vocational education, a programme will be

initiated at an annual cost of EUR 5 million. Student selection for higher education

establishments and for vocational education will be reformed and a joint electronic

application system for higher education establishments introduced in 2013. Student

grants will be developed to support full-time studying. Te student grants in higher

education studies will be changed to correspond with a two-stage degree, and

calculation of housing supplement months will be linked to the duration of studentgrants. Study loans and student transport subsidies will be developed, and the meal

subsidy for higher education students will be increased.

3,3

2,0

2,8

6,6

15,3

2,9

1,3

1,3

0,2

11,6

0,3

0,8

0 5 10 15 20

1,9

3.3

2.1

2.8

6.7

15.3

2.9

1.3

1.3

0.2

11.5

0.3

0.8

0 5 10 15 20

1.9Interest on central government debt

Ministry of the Environment

Ministry of Social Aairs and Health

Ministry of Employment and the Economy

Ministry of Transport and Communications

Ministry of Agriculture and Forestry

Ministry of Education and Culture

Ministry of Finance

Ministry of Defence

Ministry of the Interior

Ministry of Justice

Ministry for Foreign Aairs

Parliament, President and Prime Ministers Oce

On-budet expenditure by administratie branc in 2011, EUR billion


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14 B u d g e t r e v i e w 2 0 1 1

More benets within the sphere o index protectionTe livelihood of those living on the smallest pensions will be safeguarded by

introducing a guaranteed pension as of 1 March 2011. Te full guaranteed pension

is about EUR 688 per month. Te guaranteed pension will raise the pension income

particularly of women on low incomes. Te additional expenditure arising to central

government from the introduction of the guaranteed pension will be around EUR

94 million in 2011.

Basic protection benets will be linked as of 1 March 2011 to the National Pension

Index, which describes the change in consumer prices. Minimum rehabilitation

allowances, sickness, maternity, paternity and parents allowances as well as specialcare allowances, child allowance, home-care allowance and private child care

allowance will be linked to the index. Additional costs arising from the adjustment

of the level of the child allowance and minimum daily allowances, which are the

central governments responsibility to fund, will be over EUR 5 million in 2011.

In addition, a EUR 1.2 million cost item will arise to the central government from

the adjustment of home care and private child care allowances, which are a local

government responsibility.


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Aerae expenses of selected public

serices in 2008

from Jan 1, 2011

EUR/

mont

FULL NATIONAL PENSION

- living alone

- married or cohabiting

586.46

520.19

qUARANTEED PENSION

- quaranteed pension as of 1 March 2011 687.74

ChILD BENEFITS

1st child

2nd child

3rd child

4th child

5th child and each child thereafter

- single parent supplement per child

100.40

110.94

141.56

162.15

182.73

46.79

SICKNESS INSURANCE DAILY ALLOwANCES

- minimum level for sickness, maternity,

paternity and parental allowances

553.25

ChILD hOME CARE ALLOwANCE

- allowance per child

- partial child care allowance per child

315.54

90.36

PRIvATE ChILD CARE ALLOwANCE

- allowance per child 160.64

BASIC UNEMPLOYMENT SECURITY

- basic unemployment allowance or

labour market subsidy

553.41

STUDY gRANTS, MAIMUM AMOUNTS

Student rant

University students

- not living at home, under 18

- not living at home, 18+

145.00

298.00

Other students

- not living at home, under 18

- not living at home, 18+

100.00

246.00

Student ousin supplement- 80% of established housing costs 2) 201.60

State uarantee for study loans

- University students 300.00

Selected montly1) benefits in 2011

1) Benets granted on a daily basis are estimated on a monthly level.

2) The allowance is not granted for the part of the monthly housing

cost that exceeds EUR 252.

EDUCATION AND CULTURE EUR

- basic education

- upper secondary education

- initial vocational education

- polytechnic education1)

- university education1)

- public libraries

6,642

6,007

9,659

7,628

8,262

2.8

/pupil

/student

/student

/student

/student

/loan

SOCIAL SERvICES 2

- children's day care- old people's homes

50107

/day/day

hEALTh CARE SERvICES

Basic health care

- visit to health centre

- ward treatment

- dental care

71

154

68

/visit

/day

/visit

Special medical treatment

- somatic special medical

treatment 777 /day

1) On the basis of a full-time equivalent student concept in which tho-

se who have completed more than 30 credits/year and rst-year stu-

dents are given a coecient of 1, post-graduate students and those

who have completed under 30 credits/year are given a coecient of

0.5 and absent students a coecient of 0.

2) Net costs.

Sources: National Board of Education, Ministry of Education and Culture,

National Institute for Health and Welfare and Statistics Finland


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Combating the shadow economy

As part of the Governments action programme to reduce nancial crime andthe shadow economy, funding for prosecutors, courts of law, the Oce of the

Bankruptcy Ombudsman and debt recovery authorities is increased by a total of

around EUR 4 million. In addition, a further EUR 2 million is allocated to the

police. Within the ax Administration, a unit to investigate the shadow economy

is established to promote the ght against the shadow economy by producing and

disseminating information. A value-added tax reverse charge for the construction

industry will be introduced on 1 April 2011 and it is expected to increase tax revenue

by EUR 50 million in 2011 and EUR 100 million on an annual basis.

Green tax reorm to be continued

Te 2011 budget continues the shi of emphasis of taxation from taxation on work

to taxation on environmental hazards. Net taxation increases by a total of around

EUR 0.9 billion compared with that budgeted for 2010.

Energy taxation shis to taxation based on energy content and carbon dioxide

emissions, emphasising environmental steering. Te excise duty on diesel fuel will

be increased from the beginning of 2012 and at the same time the vehicle motive

force tax levied on cars and trucks will be reduced. For transport, the changes will

be implemented on a tax neutral basis whenever possible.

Energy taxes on fossil heating and power plant fuels and on electricity are increased

to compensate for tax revenue losses arising from the abolition of the employers

national pension contribution. Te net volume of the increase is around EUR 730

million, bearing in mind the growing energy tax rebates in agriculture and energy-

intensive industry. Te increase also promotes the use of renewable energy and

improves energy eciency. o avoid an excessive rise in the price of wood raw material,

the tax level on peat is lower than other fuels. Te intention is to gradually increase

the tax on peat and natural gas in 2011, 2013 and 2015. Te carbon dioxide tax on

fuels for combined electricity and heat production is halved for competition reasons.

Te tax base of the waste tax is extended to private landll sites and the tax

increased by EUR 10 per tonne in 2011 and again in 2013 by another EUR 10 per tonne.

Tis is expected to increase tax revenue by EUR 40 million in 2011. Te objective of

the waste tax reform is to promote the utilisation of waste.

Te excise duty on so drinks is increased and a new tax on sweets, ice cream

and other such products is introduced from the beginning 2011. Te purpose of the

changes is to increase tax revenue by EUR 80 million in 2011.

Income tax criteria is adjusted so that an increase in earnings level and employee

contributions1 does not lead to higher taxation of earned income and so that taxation of


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17B u d g e t r e v i e w 2 0 11

pension income is not higher than equivalent taxation of earned income. In addition,

the basic deduction in local government taxation is raised by EUR 50 to EUR 2,250.Te changes reduce tax revenue on an annual basis by around EUR 450 million,

of which the central governments share is around EUR 300 million. Te EUR 129

million tax revenue losses arising to municipalities is oset through the system of

central government transfers to local government.

Te reduced value-added tax trial for labour-intensive service sectors, initiated

in 2007, is continued in 2011.

Income tax scale in 2011

Progressive income tax rates

Ta xable earned income, EUR Tax at loer limit , EUR Rate itin bracket s, %

15 600 23 200 8 6.5

23 200 37 800 502 17.5

37 800 68 200 3 057 21.5

68 200 9 593 30.0

Average local government tax2 and social security contributions amount to 26.5%, including wageearners employment pension contributions and unemployment insurance contributions

Tax rate on capital income 28% and on corporate income 26%

1 The changes in wage earner contributions for 2011:

employment pension contribution (under 53 years of age) +0.2% points and employment pension

contribution (over 53 years of age) +0.3% points.

medical care contribution from earned income -0.28 % points and medical care contribution frombenet income -0.28% points

daily allowance contribution (wage earners) -0.11 % points and daily allowance contribution

(entrepreneurs) -0.13% points

unemployment insurance contribution +0.2% points

2 Average local government tax rate rises from 18.97 per cent to 19.17 per cent in 2011.


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18 B u d g e t r e v i e w 2 0 1 1

0

5

10

15

20

25

30

35

40

45

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

*

%

0

5

10

15

20

25

30

35

40

45

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

*

%

Income tax rate, %

Average wage earner, constant income level relative to purchasing power


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19B u d g e t r e v i e w 2 0 11

2011 budget in deficitBudgets appropriation level complies with the spending limitsTe appropriations of the 2011 budget total EUR 50.5 billion, which is just about

the same as in the ordinary budget for 2010 decided by Parliament in December

2009, but around EUR 1.2 billion less than budgeted for 2010, taking into account

the fourth supplementary budget. Interest expenses on central government debt will

be EUR 1.9 billion, which is in the same range as in 2010. Administrative branch

appropriations are around 2 per cent lower in real terms than in the ordinary 2010

budget and around 4 per cent lower than that budgeted for 2010, taking into accountthe budgets structural changes. A gradual removal of stimulus spending, among

other things, contributes to the lowering of administrative branch appropriations.

Unemployment security expenditure has also been reduced.

0

10

20

30

40

50

60

2008 2009 2010 2011 2012 2013 2014

EUR billion

Interest on centralgovernmement debt

Loans and othernancial investment

Real investment

Other transfers

Transfers to local

governments

Consumption expenditure

43.5

50.551.7

46.9

Transfers to households,

Social insurance institution

and non-protmaking

organisations

On-budet expenditure 2008-2014

Expenditure by nancial type at the prices of the year in question


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20 B u d g e t r e v i e w 2 0 1 1

o ensure a prudent long-term expenditure policy, the Government Programme

includes a multi-annual spending rule guiding the development of central governmentbudgetary expenditure during the parliamentary term. Te parliamentary term

spending limits set a ceiling for around 3/4 of the total budgetary expenditure.

Expenditure items excluded from the spending limits consist of expenditure that

varies according to cyclical uctuations and automatic stabilisers1), interest payable

on central government debt, value-added tax expenditure, nancial investments, and

expenditure where the central government acts as a technical intermediary.

Te 2011 spending limits level, aer changes in cost and price levels and in the

structure of the budget, is EUR 38.1 billion. o increase room for manoeuvre in budget

expenditure, the Government prepared reallocations totalling just over EUR 50 millionfor the various administrative branches. In addition, 2010 savings totalling EUR

46 million in agencies operating expenditure were continued. Actual development

cooperation appropriations for 2011 have been reduced from the previously planned

level. Nevertheless, development cooperation appropriations grows overall by EUR

108 million from 2010. Te 2011 budgets appropriations comply with the spending

limits. Tere is an annual supplementary budget provision of EUR 300 million for

unexpected appropriation needs in 2011.

Economic growth and tax increases will increase revenueDue to stronger economic growth and an improved employment situation, tax

revenues are projected to grow by EUR 3.5 billion, i.e. by 11 per cent, compared with

what is budgeted for 2010. ax revenues, however, would still be EUR 1.4 billion

below the level of 2008, the last year before the economic crisis.

Te budget includes measures that both increase and decrease tax revenue. ax

criteria changes overall increase net central government tax revenues by around EUR

0.9 billion compared with 2010. Te largest additions are an increase in taxes on heating

and power station fuels and electricity taxes, and the full impact on an annual basis

of the change in value-added tax rates implemented on 1 July 2010.

Central government on-budget revenue in 2011, excluding net borrowing, will

total around EUR 42.5 billion, which is 9 per cent more than budgeted for 2010.

On-budget revenues other than receipts from taxes consist, among other things, of

EU budget revenue, dividend and interest income, proceeds from betting, pools and

lottery activity, transfers from central government o-budget funds, and prots of

1) E.g. unemployment security expenditure, housing allowance, transfers resulting from the NationalPensions Act to the Social Insurance Institution of Finland, and the central governments share of livingallowance expenditure. However, expenditure eects generated by changes in the criteria for theseitems are included in the spending limits.


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21B u d g e t r e v i e w 2 0 11

state-owned enterprises entered as income. Dividend income is expected to amount

to EUR 900 million. Net income from equity sales is, as in previous years, expected tototal EUR 400 million. Proceeds from betting, pools and lottery activity is expected

to amount to EUR 516 million. Around EUR 1.7 billion is transferred into the budget

from o-budget funds, of which most comes from the State Pension Fund. Around

EUR 165 million will be entered into the budget from state-owned enterprises.

0

5

10

15

20

25

30

35

40

45

50

2008 2009 2010 2011

0

5

10

15

20

25

30

35

40

45

50

2008 2009 2010 2011

Interest incomeand prots

Miscellaneousrevenue

Excise duties

Value-added tax

Corporateincome tax

Earned incomeand capitalincome tax

Other taxes

EUR billion

Central oernment on-budet reenue

excl. use of cumulative surplus and borrowing


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22 B u d g e t r e v i e w 2 0 1 1

Central government debt has grown by EUR 30 billion in recession

Te central government budget for 2011 shows a decit of EUR 8.1 billion. otaloutput remaining at a low level as well as stimulus tax cuts decided in 2009 and 2010

contribute to the size of the decit. In 2010 the decit is projected to be around EUR

12.6 billion, if use of the cumulative surplus is not taken into consideration.

In terms of the national accounts, central government nances include, in addition

to on-budget nances, ten funds outside the central government budget, of which

one of the most important is the Housing Fund of Finland. O-budget funds are

projected to record a surplus of around EUR 0.1 billion in 2011. If the State Pension

Fund, which nowadays falls within the employment pension institutions sector in

national accounts, is also taken into consideration in the accounts, o-budget fundswill be around EUR 1.1 billion in surplus.

At the end of 2011, central government debt is projected to be around EUR 84

billion, at which time the debt-to-GDP ratio will rise to around 44 per cent. Central

government debt has grown strongly as a result of the economic crisis and the level of

debt is projected to be around EUR 30 billion higher at the end of 2011 than in 2008.

Interest expenses on central government debt will be lower than in 2008, however,

due to the historically low level of interest rates. When the general level of interest

rates returns closer to the long-term average, a substantial growth in interest expenses

can be expected owing to the higher level of debt.

0

20

40

60

80

100

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10*

0

20

40

60

80

%EUR bn

EUR bn% of GDP

Central oernment debt


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23B u d g e t r e v i e w 2 0 11

Education, 10.9 bn euro

General public services and interestexpenses, 12.2 bn euro

Defence, 2.8 bn euro

Public order and safety, 2.5 bn euro

Infrastructure and subsidies toeconomic development, 8.7 bn euro

Enviromental protection,housing and community amenities,1.4 bn euro

Health care, 13.0 bn euro

Social security incl.statutory employeepensions, 37.7 bn euro

Source: Statistics Finland, National Accounts

What are tax euros spent on?

General government expenditure in 2008: EUR 91bn/49.3% of GDP (2007: EUR 85bn/47.2%)

Recreation, culture and religion, 21.1 bn euro

Other income, 7.9 bn euro

Capital income 9.1 bn euro

Social insurance contributions, 25.5 bn euro

Value-added tax and other indirecttaxes, 23.9 bn euro

Income and wealthtaxes, 32.3 bn euro

Source: Statistics Finland, National Accounts

Where do tax euros derive from?

General government revenue in 2008: EUR 99bn/53.5% of GDP (2007: EUR 94bn/52.4%)


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24 B u d g e t r e v i e w 2 0 1 1

Central government EU revenue andexpenditureAt central government level, Finland is expected contribute an estimated EUR 1,814

million to the EU budget and the European Development Fund in 2011. Finlands

contributions are EUR 36 million lower than contributions in 2010. Finlands share

of the UKs EUR 3.0 billion budgetary rebate is EUR 74 million.

At central government level, Finland is expected to receive an estimated EUR 1,203

million from the EU budget in 2011, which is EUR 17 million less than estimatedreceipts in the 2010 budget. Structural policy support is expected to decrease by

around EUR 15 million and agricultural support and rural development support by

a total of EUR 6 million compared with 2010.

Flo of contributions beteen Finland and te EU in 2009-2011 (EUR million)

2009

Final

2010

Budet

201

Budet

CENTRAL gOvERNMENT EPENDITURE

On-budet finances

VAT payment

GNI payment

Finlands share of the UK budgetary rebate

EU PAYMENTS TOTAL

European Development Fund

237

1,276

135

1,648

54

247

1,453

100

1,800

50

242

1,444

74

1,760

54

TOTAL 1,702 1,850 1,814

CENTRAL gOvERNMENT REvENUE

On-budet finances

Agricultural supportRural development support

Subsidies from the structural funds and

cohesion funds

Custom duties and other levies

Other revenue 1

598184

199

38

28

566284

252

46

38

559285

237

46

35

Off-budet finances

Intervention Fund of Agriculture

Development Fund of Agriculture and Forestry

4

5

15

19

15

26

TOTAL 1,056 1,220 1,203

Customs duties, aricultural payments and

suar payments collected on bealf of EU 153 137 139

1Includes e.g. solidari ty and manag ement of immigration streams (2011: EUR 13.1 million) and EU TEN revenue(2011: EUR 7.7 mill ion)


23/30

25

Improved outlook for local governmentf inances, but spending discipline stillrequiredMunicipalities provide for their inhabitants basic public services, of which the

most important relate to education as well as social services and health care.

Tese services are funded mainly by local government tax revenue, consisting of

municipal taxes, property taxes and a share of corporate tax. otal local government

tax revenue is projected to be around EUR 18.6 billion in 2011. Central governmentaid to municipalities to nance basic public services will total EUR 10.1 billion

in 2011. Municipalities are compensated in full for losses in tax revenue resulting

from changes in tax criteria, by increasing central government transfers to local

government. Central government aid to local government is determined mainly

on an imputed basis. In municipal revenue this aid is universal, namely the

municipalities can use their discretion in allocating the funds.

B u d g e t r e v i e w 2 0 11

Annual marin, depreciation and net inestments of municipalities and joint municipal

autorities, EUR million

0

400

800

1200

1600

2000

2400

2800

3200

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

400

800

1200

1600

2000

2400

2800

3200

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Annual margin Net investments Depreciation of xed assets


24/30

26 B u d g e t r e v i e w 2 0 1 1

Te nancial equilibrium of local government tasks and obligations are examined

in the Basic Public Services Programme and the related annual basic public servicesbudget, which are part of the government spending limits and budget proposal

formulation. Te measures included in the budget are expected to weaken the overall

nancial position of local government by a net amount of EUR 42 million compared

with 2010.

Improving social welfare and health services, among other things, increases central

government transfers to local government by EUR 21.25 million. Tis will nance,

for example, the implementation of the reform of the Services and Assistance for the

Disabled Act, the provision of school and college health checks, the implementation

of the new Health Care Act, the arrangement of care for intoxicant abuse mothers, thestrengthening of home care for families with children as well as the establishment of

family units in prisons. Index increases increase central government transfers to local

government by EUR 152 million and changes in population structure and numbers

by EUR 56 million. Central government transfers to local government are reduced by,

among other things, the removal of the EUR 30 million temporary central government

transfer implemented in 2010.

It appears that the economic crisis has caused less damage than feared to the

local government sector. Te combined aect of several factors, such as the central

governments substantial measures to strengthen local government nances, more

favourable development of employment than expected, a slower increase in cost

levels, and municipalities own savings measures to control expenditure growth, was

already evident in clearly better than expected 2009 nancial statements. When one

also takes into account the municipal and real-estate tax percentage increases made

by the municipalities in 2010, a modest labour market settlement and the impact of

economic recovery on the development of local government tax revenue, the outlook

for local government nances can be characterised as signicantly more positive than

forecast earlier.

Although it appears that the gloomiest forecasts will not be realised, strict spending

discipline will be required in future to keep the operational nances of municipalities

and joint municipal authorities stable. Local government tax revenues are projected to

grow in the next few years on average by around 3 per cent, i.e. clearly more slowly

than in the exceptional period that preceded the recession. Te positive development

of local government nances will be immediately jeopardised if operating expenditure

growth is not adjusted to the limits set by revenue development. Of key signicance

are control of payroll costs and implementation of measures to improve productivity.

Te recovery of the national economy is still also dependent on uncertainties prevalent

in the international economy, which could, if realised, impact employment rapidly

and thus weaken the development of local government tax revenues.


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27B u d g e t r e v i e w 2 0 11

Other selections from the 2011 budget Development cooperation appropriations grow by EUR 108 million compared

with the 2010 budget. Development cooperation appropriations in ratio to GDP

will be 0.58 per cent in 2011, which is signicantly above the international target

level of 0.51 per cent.

Petty violence in close relationships is changed from a complainant oence into

an oence subject to a public prosecution. Additional funding totalling EUR 1.5

million is allocated for this to the prosecution system and courts of law.

A total of EUR 209 million is allocated to immigration expenditure, of which

EUR 86 million goes to the reception of refugees and asylum seekers and

EUR 102 million to compensation payable to municipalities. An additional

appropriation of EUR 38 million is allocated to reception and compensation

payable to municipalities compared with the level of the ordinary 2010 budget.

Te Border Guard is authorised to start the renewal of its two-engine helicopter

eet. Te total cost of the acquisition will be EUR 62 million and it will be

implemented in 20112014. Te acquisition of patrol boats is continued bygranting funding of EUR 4.2 million for 2011.

A total of EUR 6 million is allocated to the structural reform of the Emergency

Response Centre Administration and for the acquisition of a new information

system.

Agreements can be made for the acquisition of the state administrations joint

administrative and human resources management (Kieku) information system

in 2011 and thereaer with an allocation of EUR 35.4 million. Te introduction

of the system is accelerated by a year, in which case it will be in use in all agenciesat the beginning of 2014. Due to the accelerated timetable, the overall cost of the

system is estimated to be around EUR 2 million lower.

EUR 20 million, mainly in the form of appropriation transfers, is directed to

central and local government joint information system projects. Te objective

is to develop public electronic services and to improve the interoperability of all

public administration systems.

A saving arising from a reduction of age groups, EUR 18 million, is allocated in

accordance with the Government Programme to the POP programme, aimed at

improving the quality of basic education.


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28 B u d g e t r e v i e w 2 0 1 1

Central government funding of universities grows by EUR 160 million. In

addition, the University of Helsinki and the University of Eastern Finland receivecompensation totalling EUR 26 million for relinquishment of the exemption

from pharmacy sales fees.

A total of EUR 236 million is reserved for the capitalisation of universities. Te

deadline for investments of other resource providers is extended to 30 June 2011.

Mainly due to the 2010 supplementary budgets, the number of student places

in vocational basic education grow by around 3,250 places, in apprenticeship

vocational basic education by 1,000 places and in apprenticeship vocational

further education by 250 places compared with the ordinary 2010 budget. Overall

the number of students in vocational basic education has been increased through

decisions made in 20082010 by more than 10,000 places, and the resulting costs

are apparent in the 2011 budget.

Te unit price which is the basis for the central government transfer for

municipalities youth work payable from betting and lottery revenue is increased

by EUR 0.50.

Government funding for the urku as the European Capital of Culture 2011project totals EUR 18 million, of which EUR 8.5 million is allocated from betting

revenue for arts in 2011.

EUR 350,000 is allocated to fund cultural and language nests in the Smi

language in order to consolidate such activities and their funding.

Te position of farms that have made investments is improved by lowering the

minimum share of interest rate paid by farmers on certain loans granted in the

period 20002007 by one percentage point in 20112012. Te cost impact of the

change in 2011 is projected to be around EUR 6 million for interest-subsidy loansand around EUR 2 million for central government loans.

A total of 18,300 hectares of arable land is brought under the scope of

environmental subsidies and compensatory allowances for permanent natural

handicaps.

Around EUR 4 million more than in the 2010 ordinary budget is allocated to

subsidise sustainable wood production. Te new energy subsidy for small-sized

thinning wood is expected to be introduced on 1 April 2011, and EUR 13.5 is

reserved for this purpose in 2011

Provision has been made to allocate a further EUR 360,000 for agreement fees

payable to waterway owners in connection with the protection of the Saimaa

ringed seal.


27/30

29B u d g e t r e v i e w 2 0 11

An additional EUR 1.5 million compared with the ordinary 2010 budget is

allocated to fund compensation for damage caused by large carnivores. Te gamemanagement fee will be raised from EUR 28 to EUR 30.

An additional EUR 1 million is allocated to new and ongoing water maintenance

works compared to the 2010 ordinary budget.

An additional EUR 1 million is allocated to new and ongoing water maintenance

works compared to the 2010 ordinary budget.

Around EUR 976 million in appropriations and income nancing is allocated to

basic route infrastructure maintenance expenditure.

A total of around EUR 364 million is allocated to route development investments

and will be used mainly to continue construction work on 27 transport projects

initiated in previous years.

Six new transport projects will be launched in 2011: the E18 Hamina by-pass

(budget authority EUR 180 million), the main road 8 Sepnkyl by-pass in Vaasa

(EUR 55 million), the main road 19 Seinjoki eastern by-pass (EUR 63 million),

the 2nd phase of the Seinjoki-Oulu rail track service improvement project (EUR

90 million), the electrication of the Rovaniemi-Kemijrvi rail track (EUR 24

million), and the deepening of the Uusikaupunki fairway (EUR 11 million). In

addition, the central government participates in the construction costs of the

Western Metro up to a maximum 30 per cent share of the costs, with the rst

nancial contribution being EUR 13 million in 2011.

An allocation of EUR 2.7 million is made to maintenance and investments at

the Seinjoki and Mikkeli airports and EUR 1.1 million to investments at the

ampere-Pirkkala airport.

By 2015 a total of EUR 66 million, of which EUR 9.8 million in 2011, is allocated

to the administrative branch of the Ministry of ransport and Communications

for the funding of national broadband projects. In addition, around EUR 25

million is al located to the project from the administrative branch of the Ministry

of Agriculture and Forestry.

Finnpilot is a state-owned limited company as of 1 January 2011.

EUR 589 million is allocated to the funding authority of the Finnish Funding

Agency for echnology and Innovation (EKES), which is EUR 8.2 million morethan the previous year.


28/30

30 B u d g e t r e v i e w 2 0 1 1

Te main R&D expenditure of the various main titles rise to a total of around

EUR 1,930 million, which is around EUR 80 million more than in 2010. Tepublic R&D in ratio to GDP grows to an estimated 1.111.14 per cent, which is an

internationally high level.

o employment, training and special measures is allocated EUR 535 million,

which is nearly EUR 60 million higher than in the spring 2009 spending limits

decision. Compared with the ordinary 2010 budget, however, the appropriations

is lower by EUR 17 million, due to falling unemployment. Te 2011 activation

rate is expected to rise to around 24.5 per cent.

Te export renancing period is extended to the end of June 2011.

An additional EUR 10 million will be allocated for labour market support owing

to an adjustment in the income thresholds for discretionary labour market

support.

Psychotherapy compensated from health insurance as discretionary

rehabilitation was transferred within the arrangement responsibility of the

Social Insurance Institution of Finland from 1 January 2011 onwards. Health

insurance compensation costs are projected to rise as a result of the change byEUR 6.6 mil lion in 2011. Te central government contribution covers half of this,

i.e. EUR 3.3 million.

Te provision of advice on the decree on treating domestic wastewater in sparsely

populated areas is promoted by an allocation of EUR 1 million.

An additional EUR 3 million is allocated to the protection of the Baltic Sea. Tis

will be used to implement projects enhancing waterways protection for example

in agriculture and peat production. EUR 0.8 million is allocated to acquisition of

open sea oil booms used in oil combatting.

Te level of central government interest-subsidised housing production was

nearly tripled as a stimulus measure in 20092010. In the 2011 budget the level is

reduced, creating room for non-subsidised housing production. Tis is necessary

to ensure that the supply and demand relationship in housing can be balanced

and the risk of a housing price bubble alleviated. In 2011 EUR 975 million is

allocated to interest-subsidy loan appropriations for social rented housing

and EUR 285 million in guarantee appropriations for conditional-guarantee,

intermediate-model rental housing construction loans. Tese will facilitate the


29/30

31B u d g e t r e v i e w 2 0 11

construction of around 8,500 new rental homes, which is more than double the

number built in 20072008. Te construction of housing for special groups issupported with EUR 110 million in investment grants.

A total of EUR 90.5 million in grants is allocated to housing renovation, energy

and health-hazard improvement measures, namely to improve the energy

eciency of terraced and apartment buildings, to replace oil and electricity

heating with renewable energy sources and to encourage the construction of

elevators. In 2011, a total of EUR 121 million is available for costs arising from

cyclical renovation grants allotted in 2009-2010, EUR 75 million of which will be

funded by the Housing Fund of Finland.

Provision has been made to allocate EUR 900,000 to the continuation of the

national damp and mould action programme. Te objective of the programme is

to reduce the health hazards posed by damp and mould damage, and to prevent

the creation of new damage in new and renovation construction.


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MINISTRY OF FINANCESnellmaninkatu 1 A

P.O. BOX 28, 00023 GOVERNMENT

Tel. +358 9 160 01

Fax +358 9 160 33123

www.nanceministry.

Budget review 2011

ISBN 978-952-251-135-5 (PDF)

January 2011

bk 2010 enkku january

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